Randomly Noted

In my travels around Asia the past couple of weeks, I’ve been meeting with various banks and investors to learn more about the FX market in connection with our big initiative there. Stopped in to see a decent sized U.S. hedge fund and was fascinated by the investment strategy.

Among other tings, these folks invest in convertible bonds issued in local currencies in home countries. They end up with three factors that can affect returns: credit exposure, changes in interest rates and changes in currency values. The manager relayed an interesting anecdote that explained the benefit of such a strategy: the bond and underlying stock hadn’t moved much in price but the currency had to the point it allowed him to convert the bonds into stock and then sell the stock, convert the currency to dollars and make a handsome return. In other words, currency fluctuations in transactions like this can help take an out-of-the-money convertible and all of a sudden bring it in the money.

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Bill Ford, executive chairman of Ford Motor Co., worries about traffic gridlock on a global basis.

Zhengrong Shi, chairman and chief executive of China’s Suntech Power Holdings, one of the world’s largest solar panel companies, wonders whether “perhaps there’s too much democracy” in the U.S., making it difficult for the nation to adopt a coherent and consistent industrial policy.

“There are no decisions being made,” he said. “It’s like in a company. Sometimes you hear all the voices. The CEO knows what the right decision is and sometimes they just want to bang the table and say, ‘Let’s do it.’”

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One of the most interesting aspects of the 26-page annual missive penned by Berkshire Hathaway Inc. Chairman Warren Buffett was the reproduction of a 1939 letter from his grandfather and the mathematical trajectory one can trace from a homespun lesson on savings to Berkshire’s ability to massively benefit from the recent financial crisis.

In that 1939 letter from Ernest Buffett to one of his sons and the son’s wife, Ernest described the $1000 cash reserve he had built for them. “I hope it never happens to you, but the chances are that some day you will need money, and need it badly, and with this thought in view, I started a fund …” Ernest wrote. Without liquidity, he said, one might have to “sacrifice some of their holdings” when cash was immediately needed.

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One of this bloggers favorite newsletters is one put together by John Mauldin. Not only does he have his own interesting economic insights, but he flags his readers to insights from others. His most recent newsletter focuses on a year-end review by Hoisington Investment Management. The area of the review that caught my eye were some of the remarks about the municipal fiscal mess we continue to face.

For starters, Hoisington notes that the rise in municipal bond yields significantly increased borrowing costs – which is not something good for already cash-strapped municipalities. That makes it more expense to fund capital projects that were planned, which could place some of those plans in peril. The firm notes that through history, state and local governments don’t undertake big projects when they have huge cyclical deficits. What’s not said here but is another consequence – the fewer capital projects underway, means fewer jobs for the employed and unemployed.

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Many industries were battered by the economic recession and credit crisis over the past several years. And the airline industry was one that was very hard hit. Some estimates peg the global losses for the airline industry at around $30 billion for 2008 and 2009. Business travel was significantly cut back by companies looking for ways to save money. Consumers significantly trimmed vacation plans. Airlines were forced to cut routes and capacity. They grounded lots of planes.

So, if you think the economy is rebounding and that businesses and consumers alike are getting ready to spend more travel money, the cyclical airline business is one place to invest. But now, there will be another alternative way to bet on an airline recovery – and one that may show less volatility in its business.

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As 2010 draws to a close, there has been – as one could expect – a change in the top five companies traded here in terms of their market capitalizations. Three of the top five from 2009 stayed in the top five for 2010 – Exxon Mobil continues to be first with a market cap of $369.92 billion (up from $327 billion a year ago). Amazing what high oil prices will do.

The new number two is Apple, riding the success of its iPad tablet, launched in the middle of this year. Apple’s market cap at the end of this year was $296 billion, up from $188 billion a year ago. That’s a whopping 57% gain.

The other carryover was Microsoft, which came in 3rd this year at $238.27 billion. It held the number 2 spot last year with a $278 billion market cap. That means this year it declined 14%. The new kids in the top five class?

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We learn today that giant insurance company Allstate has sued BankAmerica and its Countrywide Financial unit over a bum investment. It seems Allstate bought $700 million of Collateralized Debt Obligations from Countrywide which were backed by residential mortgages originated by the mortgage lender. Allstate believes Countrywide misrepresented  the quality of the portfolio.

Well, we don’t know yet the merits of this case – and we don’t know exactly what Countrywide disclosed in the offering documents for this CDO (were these stated-income mortgages? was performance of the mortgages listed in the documents? default rates? delinquencies?) To be sure, Countrywide originated some really bad mortgages and it is entirely possible that some of those made their way into the CDO Allstate bought.

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Two of the brightest people in the financial industry are John Mauldin (great economic insights) and Meredith Whitney (she called the banking industry crisis well before it happened in 2008). And they couldn’t disagree more on how severe the budget crisis is for state and local governments – and what that ultimately means for municipal bond holders.

Whitney appeared in a recent “60 Minutes” segment  called “The Day of Reckoning,” which took a look at the financial condition of states budgets. She thinks the state governments will be ok but not so for city and county governments. She predicts a spate of 50 to 100 sizable government defaults – and was predicting that coud amount to hundreds of billions of dollars. She believes the defaults will begin within a year. (Click here to see the “60 Minutes” segment.)

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You would never see an ad in an American newspaper hawking a stock offering like the headline on this blog suggests. But it is apparently different elsewhere around the world. As I travelled to Singapore today, I was flipping through the Straits Times when I saw this large ad that caught my eyes. In big letters on top of the ad it reads: “Initial Public Offering: Hurry! Subscribe Now!”

The ad itself touts the strengths of the company, it’s growth strategies etc. And it does contain on the  bottom a footnote that suggests investors should get hold of a prospectus to read up on the company. But in the U.S., you can’t so openly reach out to investors in this way. Maybe this approach is being a little more honest and transparent. In the U.S., companies conduct “road shows” where the corporate executives get out in front of institutional investors looking to buy some of the shares. The executives are supposed to say nothing beyond what is in the prospectus. Of course, if that was the case, no investors would come to the road shows. And the road shows are not open to anyone – a small retail investor does’t get an invite.

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If you think the $4 trillion a day of trading in the FX market is huge, how about this: UBS strategists believe the market will grow to $10 trillion traded daily in 10 years. What UBS sees behind that growth is a bigger role by asset managers in the market – and in many cases, it’s more about diversifying portfolios. As more hedge funds, pension funds, mutual funds and insurance companies make investments around the world, the more need there is for them to have an FX hedging strategy.

It is a market that one would think could be vulnerable to disruptions. But the strategists at UBS don’t see much threat of that – they look back at the financial market “shocks” a couple of years ago and how well the currency markets rebounded. And they don’t see disruptions in international trade having much of an impact.

One interesting side effect – the bigger the market becomes, the more difficult it is for central banks to influence interest rates through intervention – because it would take more activity to have an effect on the markets.